Retirement Decumulation Strategies: How to Spend Your Savings

Overview

Decumulation is the phase of retirement planning when you convert saved assets into cash flow to pay living expenses, health care, taxes, and legacy goals. Unlike accumulation—where the goal is to maximize savings—decumulation is about sequencing withdrawals, managing risk, and preserving purchasing power over an uncertain lifetime. The right strategy depends on your portfolio size, health, Social Security timing, tax situation, and appetite for market risk.

(For official guidance on required minimum distributions and tax rules, see the IRS retirement pages: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions and https://www.irs.gov/retirement-plans/roth-iras.)

Why decumulation needs a plan

• Longevity risk: Many retirees now face 20–30 years or more in retirement; running out of money is a real fear.
• Sequence-of-returns risk: Large negative returns early in retirement can permanently reduce sustainable withdrawals.
• Taxes and policy: Withdrawals from traditional 401(k)s and IRAs are taxable; Roth accounts behave differently. Recent law changes (SECURE Act and SECURE 2.0) changed RMD ages—check the IRS for your situation.
• Health and long-term care costs: These often rise with age and can be unpredictable, so liquidity matters.

In my work with clients, the biggest mistakes are failing to coordinate taxes with withdrawals and not having a contingency plan for bad markets. A written decumulation roadmap helps avoid emotional, costly decisions when markets swing.

Core decumulation approaches (and when to use each)

1. Systematic Withdrawal (cash-flow method)

• What it is: Take a regular percentage or dollar amount from your portfolio (monthly, quarterly, annually).
• Pros: Simple, predictable income stream; easy to budget.
• Cons: Risk of depleting assets if withdrawals are too large or markets perform poorly.
• When to use: Smaller portfolios or when you prefer hands-on control and flexibility.

1. The Bucket Strategy

• What it is: Segment assets into time-based “buckets”: short-term (1–3 years) in cash, mid-term (3–8 years) in bonds or conservative ETFs, long-term (8+ years) in equities.
• Pros: Smooths spending during downturns, reduces the need to sell growth assets at low prices.
• Cons: More complex to manage and rebalance.
• When to use: Retirees who want a hybrid of stability and growth and who can tolerate some administrative complexity.

1. Annuities and Guaranteed Income

• What it is: Insurance contracts (fixed, variable, immediate, deferred, QLACs) that convert a sum into lifetime or period income.
• Pros: Can eliminate longevity risk by guaranteeing income for life; helpful for essential expenses (housing, utilities, minimum living needs).
• Cons: Costs, surrender charges, inflation protection varies, and liquidity is reduced.
• When to use: When a portion of your expenses must be covered by guaranteed income or when risk tolerance is low.
• See our related explainer: Annuity and Qualified Longevity Annuity Contract (QLAC).

1. Annuity Laddering

• What it is: Stagger purchases of deferred annuities so you receive increasing guaranteed income later in retirement.
• Pros: Provides rising income and hedges inflation and longevity risk without committing all capital at once.
• Cons: Requires planning and monitoring; product costs and counterparty risk are considerations.
• More on related tactics: Annuity Laddering.

1. Tax-First Sequencing (Roth conversions and taxable buckets)

• What it is: Withdraw from taxable, tax-deferred, and Roth accounts in an order that minimizes lifetime taxes—often starting with taxable accounts, then tax-deferred, and leaving Roth for later, but conversions to Roth can make sense in low-income years.
• Pros: Can reduce required minimum distributions later and lower tax brackets when Social Security or pensions kick in.
• Cons: Roth conversions generate taxable income in the year of conversion.
• When to use: When you expect higher tax rates in the future or have available standard deductions and low taxable income years.

Practical steps to build a decumulation plan

1. Inventory guaranteed income sources: Social Security, pensions, and any annuity income. Decide whether to delay Social Security to increase your monthly benefit (SSA guidance: https://www.ssa.gov/).
2. Estimate essential vs discretionary expenses: Match guaranteed income to essentials first (housing, utilities, minimum health costs). Discretionary expenses can come from investment withdrawals.
3. Choose a withdrawal rate or combination approach: Use a conservative baseline—many planners still reference the 4% rule, but modern research suggests flexibility: consider 3–4% initial rates and adjust for market conditions, life expectancy, and portfolio mix.
4. Sequence withdrawals tax-efficiently: Coordinate taxable, tax-deferred, and Roth accounts; consider Roth conversions in years of unusually low income.
5. Protect against big market losses: Keep 1–3 years of cash or short-duration bonds and use the bucket method or a glidepath of gradually shifting to more conservative allocations.
6. Revisit annually and after major events: Update projections for health, spending, market returns, and tax law changes.

In my practice, I typically model three scenarios—base, optimistic, and downside—and stress-test withdrawal rates against a range of market return sequences. That often leads clients to adopt a slightly lower initial withdrawal rate with rules to increase or decrease withdrawals based on rolling 3–5 year portfolio performance.

Taxes, RMDs, and special considerations in 2025

• Required Minimum Distributions (RMDs): The RMD rules have changed in recent years (SECURE/SECURE 2.0). As of 2025, check current IRS guidance to confirm your RMD age and calculation method (IRS: https://www.irs.gov/retirement-plans/required-minimum-distributions-rmds).
• Roth IRAs: Roth IRAs do not require RMDs for the original account owner, but Roth 401(k)s may—check plan rules and IRS guidance (https://www.irs.gov/retirement-plans/roth-iras).
• Social Security taxation and Medicare premiums: Withdrawals and income levels affect taxation of Social Security benefits and Medicare Part B/D premiums (IRMAA). Coordinate withdrawals to avoid unintended increases in Medicare premiums.

Real-world examples (anonymized, representative)

• Conservative couple in their late 60s: We protected essentials by buying a single-premium immediate annuity to cover housing and Medicare premiums and maintained a bucket for 3 years of spending. They kept the rest invested for growth. Result: income certainty for essentials and growth potential for legacy.

• Growth-focused single retiree: With a $900k portfolio and strong health outlook, we used a 3.5% initial withdrawal, tax-aware Roth conversions during low-income years, and a modest bond ladder for liquidity. That combination reduced future RMD spikes and preserved estate value.

Both approaches used clear withdrawal rules tied to portfolio performance—reducing discretionary spending if the portfolio underperformed versus plan assumptions.

Common mistakes to avoid

• Relying solely on the 4% rule without flexibility for market conditions or tax changes.
• Forgetting the tax impact of withdrawals and Roth conversions.
• Leaving all assets in one bucket or product without considering liquidity needs.
• Not coordinating Social Security claiming strategies with withdrawals and tax planning.

Checklist for your first decumulation meeting

• Gather statements for all retirement, brokerage, and bank accounts.
• List guaranteed income (Social Security, pensions, annuities) and expected dates.
• Prepare current spending estimate (essential vs discretionary).
• Note health status, long-term care insurance, and family longevity history.
• Decide risk tolerance and legacy goals.

Tools and resources

• IRS retirement rules: https://www.irs.gov/ (RMD guidance page)
• Social Security benefits: https://www.ssa.gov/
• Consumer-focused retirement planning: https://www.consumerfinance.gov/consumer-tools/retirement/

Internal resources on FinHelp:

• Annuity (explainers and product trade-offs): https://finhelp.io/glossary/annuity/
• Qualified Longevity Annuity Contract (QLAC): https://finhelp.io/glossary/qualified-longevity-annuity-contract-qlac/
• Annuity Laddering strategies: https://finhelp.io/glossary/annuity-laddering/

Final practical tips

• Start with essentials-first: ensure guaranteed income covers necessities.
• Build flexibility: create withdrawal rules tied to portfolio performance rather than fixed dollar withdrawals alone.
• Use tax-managed sequencing: plan Roth conversions in low-tax years to reduce future RMDs and taxable retirement income.
• Reassess annually: small changes in health, spending, or markets can justify adjustments.

This entry is educational and based on industry practice. It is not individualized financial, tax, or legal advice. For recommendations tailored to your situation, consult a certified financial planner or tax professional.